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In the world of financial markets where money can be made and lost around the
clock, the marketplace can be indeed a battle ground for many investors. Investments
regardless of market conditions have both their advantages and disadvantages, depending
on a myriad of variables such as economic and political conditions.
It is normal to observe that in a bull market when prices of stocks are rising, people
will generally be investing actively as they believe prices will keep rising while
in a bear market when everything seems to turn negative, they will be reluctant.
Most investors do not know what to do and in most cases, they have no idea at all
except react in a panic. It is certainly a heartbreaking experience to suddenly discover
that all the money made in the markets just six months ago has been burnt in just
a matter of seconds.
Being in the right place at the right time may make you profits but how many times
do you actually hit the jackpot? Trading in financial markets is certainly no easy
task. Amazingly, some investors do manage to make a fortune over a relatively short
time.
The question is do these people actually possess real trading abilities that help
them achieve spectacular returns overnight or did they just happen to hit the bullseye?
Very often investors who make a killing on a few bets are likely to lose out even
more in the long run without a disciplined approach.
In a volatile investment environment, discipline and skill is required in order to
make consistent returns. Real trading requires more than simply reading all the books
and articles on investing. Good judgment is a key aspect of investing. You do not
rush out to sell a stock with strong fundamentals and long term growth prospects
just because it has hit a temporary low spell.
A smart investor would consider buying even more shares - at bargain prices. You
also do not rush in and buy share when its price has already hit its all time high
- you should be thinking about unloading it. The test of smart investing is knowing
when to buy and sell.
There are a few ways to protect your investments and maybe even enhance your returns.
- Asset allocation - diversify risks
- Investing regularly - the beauty of dollar cost averaging
- Reinvesting - the power of compounding
Asset allocation plays a fundamental role in any investment plan. Sounds fancy? Not
really as the concept is simple - spread your investments amongst different investment
options. Spreading out your investment options helps you to manage market risks.
For those who were heavily into only equities, recent market events shows clearly
the need to diversify and spread your investments.
Having a diversified investment plan helps you to develop a disciplined approach
to investing. Firstly you have to determine your risk profile. Remember the risk/return
equation. The higher your risk tolerance, the higher your potential reward over the
long term. Consider all the risk elements that are potential "enemies of your
wealth" - market risks, interest rate risk, inflation and taxes, political risks
to name a few.
Take a look at your financial goals - what are you investing for, how much can you
invest, how long can you invest for. Once you have these objectives mapped out, you
can at least effectively manage your risk even though you have no control over fluctuating
markets, inflation and very often your emotions. Yes, your emotions constitue investors
risk - How many times have you bought stocks because all your friends are buying.
You bought just so you won't miss out and even though you know buying was based on
rumours and not on fundamentals? How often have you put off selling a losing stock
because its too painful for you, inspite of the fact that you know its good for you.
The recent "collapse" of the global markets due to panic selling is one
good example.
When you have determined your risk profile and investment objective, plan your asset
allocation to match your profile. Invest a portion in fixed interest securities,
equities or equity funds and property or property stocks. Take into consideration
your time horizon. The longer your investment time horizon, the less you need to
worry about short term fluctuations. Invest a greater proportion in more conservative
vehicles if your investments are short term or if you are of the older generation.
Adjust your asset allocation from time to time as your risk tolerance and investment
objectives change with time.
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